The price of auto insurance is a hot topic amongst those who are figuring out, or always keep tabs on, their spending. Auto insurance continues to get more and more expensive. The smart shopper may want to shop around to ensure that they're getting the best rate for their situation, and so it is common to ask your friends, "How much are you paying for auto insurance?" Unfortunately, the answer doesn't really tell you anything because there are so many variables.
I'm not an auto insurance expert, so I reached out to Melanie Hart at USAA to help me better understand the subject.
One of the most important variables is how much insurance you're actually buying. While insurance can vary a lot from state-to-state (and so can the costs,) there are two main points to consider: which types of coverage you are carrying, and how much coverage you are carrying. Not having the right coverage, or the right amount of coverage, can leave you unprotected in case of an accident or other loss. It is really important that you have enough coverage!
Types of Auto Insurance CoverageI hear a lot of people talk about having "full coverage" on their vehicles, so I asked Melanie about it. From the insurance company's perspective, full coverage means that your policy includes coverage for collision, liability, and comprehensive coverage.
Liability coverage can contain a couple of different parts, but generally covers the expenses of other people if you cause an accident. This might include property damage, including the vehicle, trees, houses, etc., medical payments, legal bills, and any other kind of judgement made against you.
Liability insurance is essential. Most states require it, and it protects your assets and income in case you cause an accident. Melanie described liability insurance as a "chief cornerstone of personal financial security," and I absolutely agree.
Collision coverage is for the damage to your vehicle as the result of a collision.
Comprehensive coverage is for any damage to your vehicle due to causes other than a collision. This might include theft, vandalism, hail, water, fire, and animal strikes.
Collision and comprehensive coverage are probably required if your vehicle is financed, but those who own their cars in full may choose whether to carry collision and comprehensive coverage.
Amount of Auto Insurance CoverageHow much insurance do you need or want? This is a very individual question based on upon a wide variety of factors, and the decision for liability coverage is different from the decision for comprehensive and collision coverage.
Amount of Comprehensive and Collision CoverageComprehensive and Collision coverage are often lumped together, even though they cover different risks. If you have a loan on your vehicle, you are probably required to carry both comprehensive and collision coverage.
If your vehicle does not have a lien (loan) against it, then comprehensive and collision coverage are optional. Do you want it? That depends. Melanie points out that it is important to consider the value of your vehicle versus the cost of coverage. The break-even point is going to be different for every situation, in part because your car's cash value might not equal its value to you, and because coverage costs vary by location. You also have to consider the size of your deductible, your ability to withstand a loss, and your likelihood to make a claim.
Amount of Liability CoverageMost states have required minimum liability amounts to provide some protection to others from damage caused by you. However, these state minimums are typically very low. If you are carrying only the, state required insurance, you probably don't have enough insurance.
For example, let's look at California. The state minimum insurance required is 15/30/5. This means that your insurance will cover up to $15,000 for each person injured in an accident, up to a maximum of $30,000 for the entire accident, and $5,000 worth of coverage for property damage. Even a minor accident could be more than the amount your insurance covers. A major accident, including multiple vehicles and/or serious injuries, will definitely exceed those low coverage levels.
When you cause an accident, and the damages exceed your liability coverage, you become personally responsible for the rest of the money, whether it be for medical bills, vehicle replacement, or any award from a court. Without the enough insurance, you will be using your savings, your assets, and potential even your future earnings to pay that bill.
Let's imagine you carry the state minimum auto insurance in California, and you cause accident with a brand-new Honda Civic that has four occupants. Your insurance will only cover the first $5,000 of damage to the car - you're responsible for the value of the car beyond $5,000. For injuries, you only have a total of $30,000 in coverage for all four occupants; again, you're liable for any costs beyond. As we all know, medical care is expensive. It wouldn't be hard to exceed that $30,000 in medical coverage if even one person has more serious injuries. If the other parties take you to court, they could seize your assets and savings, and you could be required to make payments for years into the future.
Everyone's situation is different, but I'll share my insurance details with you just so you can compare. My family carries $300,000/$500,000/$100,000 in liability coverage, plus more that I'll explain below.
Per Melanie at USAA, "a person should carry enough liability insurance to protect their current assets and their future earnings." When deciding how much liability insurance to purchase, you have to consider your current assets plus your future earnings capacity, and how much risk you are willing to take. Liability insurance is relatively cheap; this is not a place to skimp.
Umbrella Liability InsuranceFor those who are particularly concerned about their personal liability, you can purchase additional liability insurance that sits on top of your auto and homeowners or renters insurance. This insurance, called umbrella liability insurance, can provide a lot of coverage for a relatively small price.
Every person has different insurance needs, but it is important to understand how the coverage you select may result in higher out-of-pocket costs if you are involved in an accident or other loss. Many people mistakenly assume that the state minimums will provide them with appropriate coverage, and this is rarely true.
Many thanks to Melanie at USAA for talking with me about this fascinating topic!